Managerial Accounting
Class Notes and Lecture Outline
Pricing Methods
pricing method
1. intuitive method
prices are not related to profit
2. multiplier method
uses fixed multiplier
relatively easy
pays little attention to competition
value of money not considered
little thought to the maintenance of price changes
3. trial and error
confuses customers
ignores economic conditions
ignores the competition
4. price cutting method
reduces price levels below the competition
ignores your cost of sales

5. high price method
charge higher prices than the competition
focus on differences from competition
customers may not be willing to pay the extra price for your differences
6. competitive method
matches prices to competition
customers do not see your operation as being any different from your competition
7. mark-up method
applies a known COS percentage to determine price
the COS percentage may be out-of-date and incorrect
8. bottom-up approach
includes net profit as a cost
can be difficult and time consuming to compute
What is the Right Method to use to set Prices?
  • the right method should consider...
    • the overall profitability goals of the business
    • the competitive market place and supply and demand
    • your competition
    • change in pricing strategy over the long run
The Bottom-Up Approach to Pricing
  • requires four basic assumptions
    1. sales is represented as a 100% figure of an income statement
    2. all variable costs can be expressed as a percentage of sales revenue
    3. all known repetitive overhead can be identified
    4. the desired net income after tax and an appropriate tax rate are known
  • the bottom-up approach method
    • STEP 1 - using the net income and tax rate information calculate the net income before taxes figure
    • STEP 2 - add overhead costs to the net income before tax figure
    • STEP 3 - divide the total from step 2 by (100% - the VC%)  ==>  this gives us the projected total sales needed to cover all costs including an acceptable profit for ourselves
    • STEP 4 - determine how many product/service units will be sold
    • STEP 5 - divide total sales revenue by projected unit sales to determine the selling price for each unit

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this page is maintained by Reed Fisher
last updated January 15, 2011